How to Underwrite a Deal Without Falling for “Potential Rent”

Question

One of the fastest ways to lose money in real estate is underwriting based on fantasy. Sellers love quoting “potential rent,” wholesalers love inflating ARVs, and new investors love convincing themselves they’ll magically hit top-market numbers. But none of that pays the mortgage.

If you want predictable cash flow, you underwrite deals based only on what the property can realistically produce the day you buy it. Not hypothetical. Not “after a few upgrades.” Not “once you raise tenants.” Reality.

Here’s the framework we use:

1. Ignore future rent. Underwrite today’s rent.

If the property is already rented, use current rent.

If it’s vacant, use the actual verified program rent for its current bedroom count.

Not “maybe you can get 3-bed pricing once you add a wall.”

Not “market comps say you could get more.”

Reality only.

2. Underwrite based on rent-ready, not fully renovated.

Most investors run numbers as if the rehab is already done. Wrong.

Underwrite the deal as-is.

Then add rehab, holding, and turn costs separately.

This keeps you honest.

3. Verify Section 8 rents before you even walk it.

Memphis has clear ranges. You either know the payment standard or you don’t have a deal. We always confirm the actual rent that MHA will approve for that zip code and bedroom count.

4. Always stress-test the deal.

We run numbers three ways:

• Worst case: inspection delays, tenant slow approvals

• Base case: regular turn, normal rent

• Best case: new voucher, max allowable rent

If it doesn’t cash flow in the base case, we’re not interested.

5. Don’t assume rent increases will save the deal.

MHA does raise rents, but that’s a bonus, not a plan. If you need a future rent increase to break even, the deal is already broken.

6. Use conservative vacancy and maintenance numbers.

• Vacancy: minimum 5%

• Maintenance: minimum 10%

Distressed properties need even more. Investors lose money because they ignore these.

The formula is simple:

Underwrite reality. Execute consistently. Let appreciation be dessert, not the meal.

What’s the most unrealistic “potential rent” number you’ve ever seen on a deal sheet?

Andrew Caranto · Answer

Underwriting was definitely overwhelming at first, and I think a lot of new or newer investors struggle with this. One of the biggest drawbacks is that everything is kind of scattered between different spreadsheets and sometimes spreadsheets with multiple pages that you have to flick back and forth through. You lose context and the clear understanding of how things are moving when you change inputs.

I helped my investing group move past this blockade by developing simple-to-use and highly visual underwriting calculators that call out changes in real time. More than 10x'ed our output when qualifying deals for further evaluation.

Pavel Voroniuk · Answer

@Dylan Kitzinger

Welcome — underwriting can feel overwhelming at first.

I spend a lot of time underwriting deals and breaking them down step by step, and what helped me most early on was focusing on conservative rent assumptions, realistic expenses, and seeing if a deal still works at today’s rates before thinking about upside.

If it helps, I’m happy to outline a simple step-by-step way I approach underwriting.

Dylan Kitzinger · Answer

Hi James, new to the site (literally just signed up today) and wondering if you know or maybe now of a good post here about how to actually underwrite a deal? Just started watching the BP videos on youtube so I'm still looking for the a good video or forum post that gives some good examples.